Quiz 13: Auditing the Inventory Management Process


Inventory auditing: Inventory represents the most important part of the audit, because the assignment of cost to the inventory value is a complex process, and associated with various factors like obsolescence, and lower cost and market price. The obsolete inventory is valued at a lower price.Also, the method of valuation of inventory differs because of the nature of production, and inventory processing. Depending on all the above factors, the complexity of auditing inventory also increases.

Relation of Inventory Management Process: The inventory management process is related with the revenue, purchasing, and payroll process in the following way. • To Revenue Process: The raw material is converted into finished goods, and the finished goods are sold by the company. • To Purchasing Process: Purchase of raw material, and payment of manufacturing overhead costs. • To Payroll Process: Assignment of direct, and indirect labor costs.

The description of the documents is as follows: Production schedule: The Production schedule is a document used to determine the quantity of goods required in the process of production, and the time requirement of goods to meet the scheduled production. Production schedule is prepared on the basis of expected demand for an entity's product. Material requisition: The material requisition is a document which authorizes the release of raw material from the stores department or raw material department. Material requisition is used to track the material during the process of production. Inventory master file: The inventory master file contains all the important information related to the entity's inventory, including the perpetual inventory records for raw material, work in process, and finished goods. Production data information: Production data information is a report which contains details about the transfer of goods and related cost accumulated in each stage of production. This information is used to update the entity's perpetual inventory system, and is also used to generate the cost accumulation and variance reports. Cost accumulation and variance report: The cost accumulation report is a summary of cost allocation to various departments, such as: accumulation of material, labor, and overhead cost. The variance report presents the result of inventory processing by comparing the actual cost with the standard or budgeted cost.

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